Most you might think it is impossible to earn a risk-free return of 60 per cent annually during the current era of low interest rates. Nothing could be farther from truth.
It is definitely possible for people earning over Rs 350,000 a year to earn those kinds of returns on their investments every year. Here's how.
In the recent budget, Finance Minister P Chidambaram has allowed annual investments of up to Rs 100,000 to be deducted from total income before computing income tax.
Investment can be done in various instruments like PPF (Public Provident Fund), EPF (Employees Provident Fund), ELSS (Equity Linked Savings Schemes), tax saving mutual funds, infrastructure bonds, insurance and so on.
Let's assume that person invests a total of Rs 100,000 in various tax saving instruments this year. Because he is in the 33 per cent tax bracket (we have assumed that he earns Rs 350,000 at least a year), Rs 100,000 will be deducted from his income before calculating his income tax. His income tax will thus be reduced by Rs 33,000 (i.e. 33 per cent of Rs 100,000).
Return in the first year
As this person is investing Rs 100,000 and simultaneously saving Rs 33,000 in tax, he is effectively investing just Rs 67,000.
Assuming that this person gets an 8 per cent return, he will have Rs 108,000 by the end of the year by investing just Rs 67,000.
So effectively he will earn more than 61 per cent in the first year.
Return from second year onwards
From the second year onwards, he will get an interest amount of Rs 8,640 (i.e. 8% of Rs 108,000) on the original investment of Rs 67,000.
Effectively he will earn about 12.9 per cent from the second year onwards.
This is one of the greatest opportunities that the Budget has offered in terms of earning high, but risk-free, return.
And this opportunity must be used by all investors to the maximum extent possible.
The author works with a software company in Bangalore. The opinions expressed here are personal.